# Deferred Taxes

Hello all, was hoping some one could clarify the following problem with regards to what they mean by: A)a \$26,000 taxable temporary difference and B)a \$6,000 of deductible temporary differences Taken from the following problem: Assume a first-year company has current taxable income of \$200,000, a \$26,000 taxable temporary difference and \$6,000 of deductible temporary differences. The tax rate is a flat 35%. The financial income can be computed as: Taxable income \$200,000 Taxable temporary differences 26,000 Deductible temporary differences <6,000> Pretax financial income \$220,000 The journal entry to record the income taxes is: Current income tax expense (200,000 X 35%) \$70,000 Deferred tax asset (6,000 X 35%) 2,100 Income tax expense—deferred 7,000 Deferred tax liability (26,000 X 35%) 9,100 Income taxes currently payable 70,000 Thanks

Hi Reineir, Basic Introduction to Deferred Tax: Taxable temporarydifference: This is the amount that will be taxable in the future period,. For example , a machinery with a cost of 20000 with a useful life of 4 years will be depreciated at 5000 per annum. Therefore the company has generated revenue for the 5000 depreciation in year 1 by way of using the machinery. Company will generate further 15000 in three years time and will be paying tax on it. Remember depreciation is only an accounting measure. If there were capital allowances then that would be deductible for tax purposes. Anything that is not deductible will be charged in future years and therefore a temporary difference arises. Deductible temporary difference: This is the amount that will be deductible in the future period. For example rent received in advance for future period. Rent received in advance is included in computing the taxation of the current period(cash basis) but not in the accounting profit (as it relates to future period). So the company will be paying less tax in future period and therefore a deductible temporary difference arises. In the above example the company has 200,000 taxable income. This is straightforward and it will be charged at a tax of 35%= 70000 TTD: 26000*35%= 9100. This results in a deferred tax liability as it will be paid in future years. DTD= 6000*35%=2100. This results in a deferred tax asset as it will be realised in future years. Net deferred Liability =9100-2100= 7000 Therefore the above entries: Deferred tax asset (6,000 X 35%) 2,100 Dr Income tax expense—deferred 7,000 Dr Deferred tax liability (26,000 X 35%) 9,100 Cr Remember 2 rules: TTD: Always gives rise to a deferred tax liability DTD: Always gives rise to a deferred tax asset provided that company will generate sufficient profits in future period to utilise the deductible temp. difference. Deferred tax assets or liabilites are never realised or paid. They are only included in the balance sheet to reflect the position of the company at that date. These assets and liabilites will reverse in the future period and consequently become current tax asset or liability. PS: This topic require 200% attention and is the most difficult I have ever encountered. Cheers Sumo

Hi Sumo, Thank you so much for your brilliant constructed explanation, you’ve really helped me to understand the fundemental concepts. Really appreciated!! Cheers